What is concentration risk? 

Concentration risk in Frec Diversify measures how much your portfolio is projected to deviate from its index benchmark over the next year. The underlying metric is sometimes referred to as "projected tracking error" and represents the projected standard deviation of the difference between your portfolio and the benchmark's returns.

A higher concentration risk indicates greater variation in performance relative to the benchmark. Actual concentration risk may differ from projections, and there is no guarantee of future performance. We aim to reduce your concentration risk over time, targeting a level below 4% on an annualized basis.

Why does Frec call it concentration risk?

You may also see this metric referred to as "projected tracking error" elsewhere on Frec, the underlying calculation is the same. Because Diversify is specifically designed to transition your concentrated stock positions into a diversified index, we frame this metric as concentration risk to reflect how much exposure your portfolio still carries to the performance of your concentrated stock relative to your benchmarked index. You can learn more about how the underlying metric is calculated in our help center article on direct index tracking error.

What drives your concentration risk?

Your concentration risk reflects two things working together:

• The size of your concentrated position. The larger that position relative to the rest of your portfolio, the higher your concentration risk.
• The volatility of your concentrated stock. Two clients with the same position size can see very different concentration risk numbers depending on the stock, a more volatile stock contributes more to concentration risk than a less volatile one.

How your concentration risk changes over time?

Your concentration risk is typically highest on Day 1, when most of your portfolio is still tied to your concentrated stock. As Diversify sells down your concentrated position and shifts your exposure toward your benchmarked index, your concentration risk generally decreases over time.

That said, the decline is not always linear. Concentration risk depends partly on the forecasted volatility of your concentrated stock, and it may rise temporarily during periods of heightened market volatility, even as your concentrated position is being sold down. This is expected behavior and does not mean Diversify isn't working.

We aim to reduce your concentration risk gradually, targeting a level below 4% on an annualized basis, the threshold at which we consider your concentrated position to be effectively diversified.

Where to view your concentration risk?

You can see your current concentration risk anytime on your Diversify portfolio page in the Frec app, alongside your overall diversification progress.

Important to know

Concentration risk is a forward-looking projection based on current portfolio holdings and market data, it is not a guarantee of future results. Actual portfolio performance relative to the benchmark may vary, and projections are updated as your portfolio and market conditions change.